Save Tax by Creating HUF – Advantages and Limitations. Save Tax by Forming HUF – Taxability, Advantages, Limitations, More Exemptions by Creating HUF, If you know it, you can save it. There are various legal ways to save the tax, out of which one of them is by creating a Hindu Undivided Family (HUF). This way of saving tax is highly beneficial as the HUF is considered to be a separate entity in the eyes of law and so it enjoys the additional limit for taxation. In this article, I have briefly discussed about the HUF, how it is formed, its tax planning, when it is useful to create and many other relevant facts.
Creating HUF – Tax Savings, Taxability, Advantages, Limitations
What is known by HUF ?
HUF is an entity which formed under the Hindu Law Board, which can be formed by married couple. There should be at least 2 members in it which may include Husband, Spouse and there children as well. There should be at least 1 male member in HUF. The most Senior person in HUF would be regarded as “Karta”, other will be regarded as members of HUF.
How to form a HUF ?
Actually there is no need for forming any HUF, as it is formed automatically. It is formed automatically when a male person marries a female person and from that moment the HUF is formed. You just need to make it legally formed. For that you need to do the following steps:
- First of all you need to open a bank account in the name of HUF.
- You should now apply for the PAN card, which would give its legal identity.
- The next thing you need to to do is to generate the capital in the HUF by transferring the ancestral property or any asset which would give HUF to earn income.
Taxability of HUF:
The taxability of HUF depends on what you are carrying out in the name of HUF. The main person in HUF would be Karta. SO his decision would be the final one. The one point you should note that the HUF is an artificial person so you should not have any income as salary to it, as the salary in payable to individuals. HUF can be having the property which can be letted out and receiving some rentals from it and it can also be running the business in its name which would yield him more profit by allowing the deductions.
As HUF is having a separate legal entity, it has its own PAN card, which would yield him another basic exemption limit of Rs. 2,50,000. One thing is for sure clear that if the HUF is having the other income except rentals or business profit than it would be clubbed with the income of karta. Now we would see how the tax benefits of creating HUF actually works.
- Tax Treatment of Gifts Received By an Individual or HUF
- Download Affidavit Format for PAN Application of HUF
- Download Latest Income Tax Return Forms – ITR Forms
If there is income of karta of say Rs. 10 Lakhs and other members which are having the income of say Rs. 8 Lakhs. If they have the ancestral property which is idle and thinking of letting out the same, then this would be helpful. You can transfer the said property in the names of HUF and the rentals from it would be assessable in the names of HUF. So if there is Rental income of Rs. 2.5 Lakhs, it would be fully exempt as it would cover the basic exemption limit and leading to save a lot of taxes.
There are various deductions also available while you conduct the business in the HUF. Various deductions are available such as Remuneration to Karta, Loan to karta or HUF members, etc. which are all allowable as expenses while computing tax profit.
Firstly it would be beneficial only to the people who are having good higher income falling in the slab rate of 30%, which would help them to bifurcate the income and make separate taxability.
On the other hand, it is to be noted that the property which is once transferred to the HUF cannot be transferred to any individual. It cannot be transferred by any of the ways such as transfer deed or will. As it has become the family asset. It would be divided only when the HUF is partitioned.
Leaving asides the minute drawbacks of the HUF, it is very much advisable to form a HUF and take the benefit of that separate PAN card while paying taxes.